Arguments note benefits of bilateral arbitration

Pitting the National Labor Relations Act against the Federal Arbitration Act, three consolidated cases involving class waivers in employment arbitration agreements — Epic Systems Corporation v. Lewis; Ernst & Young, LLP v. Morris; and NLRB v. Murphy Oil USA, Inc. — stand to reshape the future of employment litigation. At oral argument on Monday, counsel for the respondent employees confirmed that if the U.S. Supreme Court affirmed the trilogy, the decision would potentially invalidate agreements covering 25 million employees.

All three cases ask whether an employment arbitration agreement with a class and collective action waiver is enforceable or barred by the NLRA. At the core is whether joint, collective, representative or class action litigation in the courthouse or in the arbitral forum is concerted activity protected by the NLRA.

Bilateral arbitration is cost effective in the employment context and typically causes less disruption to an employer’s business. Arbitration is less expensive for employees and as noted in the Pacific Legal Foundation’s amicus brief, arbitration results in a faster resolution. But class arbitration strips the process of its benefits, requires procedural formality, results in slower dispositions and proportionally higher costs, and creates bet-the-company risks while providing virtually no substantive appellate review. As counsel for the employer-companies, Paul Clement noted early into his argument, for 77 years the National Labor Relations Board “did not find anything incompatible about Section 7 and bilateral arbitration agreements.”

Section 7 of the NLRA protects employees (not just union members) who engage in “concerted activities” for “mutual aid or protection” in the workplace. Section 8(a)(1) of the NLRA prohibits an employer from interfering with employees’ Section 7 rights. The FAA, however, declares that a contract to arbitrate claims related to a “transaction involving commerce” “shall be valid, irrevocable, and enforceable.” The purpose of the FAA was to protect the parties’ rights to arbitrate their claims and to eradicate judicial hostility toward arbitration. Recognizing the FAA’s mandate, the Supreme Court has repeatedly recognized the strong public policy for allowing parties to agree to forums outside of the judicial system. E.g., Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013); AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).

D.R. Horton & Murphy Oil

In January 2012, the National Labor Relations Board held that an employer who requires employees to sign an arbitration agreement that waives their right to pursue class and collective claims violates Section 8(a)(1) of the NLRA. D.R. Horton, Inc., 357 N.L.R.B. 184. Despite the practice of including class waivers in employment arbitration agreements after Concepcion, the NLRB reasoned that, “[t]he collective pursuit of workplace grievances through litigation or arbitration is conduct protected by Section 7,” so requiring employees to bring employment claims on an individual basis violated the NLRA by depriving them of that right.

The 5th U.S. Circuit Court of Appeals disagreed, holding (1) the NLRA is silent as to any “congressional command overriding” the FAA and (2) bringing litigation as a class “is not a substantive right” under Section 7. D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013). Because bringing class litigation is not a substantive right, employers may require as a condition of employment that employees waive the ability to proceed as a class. The 5th Circuit held it was not an unfair labor practice for an employer to require employment disputes be resolved through individual arbitration. Even so, the 5th Circuit enforced the NLRB’s order requiring the employer to clarify the agreement, finding that the language of the specific agreement could be misconstrued as prohibiting employees from filing unfair labor practice charges.

Ten months later, the NLRB again found an arbitration agreement requiring individual arbitration violated the NLRA. Murphy Oil USA, Inc, 361 NLRB No. 72 (2014). The agreement allowed the employee to bring an unfair labor practices action but contained it a class waiver. The 5th Circuit declined to enforce the NLRB’s order and again held that “the corporation did not commit unfair labor practices by requiring employees to sign its arbitration agreement or seeking to enforce that agreement in federal district court.” Murphy Oil USA v. NLRB, 808 F.3d 1013 (5th Cir.2015). Bringing temporary relief to employers, the 11th, 2nd and 8th U.S. Circuit Courts of Appeals have similarly enforced class waivers in employment arbitration agreements but those decisions may be on shaky ground.

While the NLRB argues that the NLRA’s Section 7 protections supersede the FAA, the NLRA does not address arbitration, even though the NLRA was passed nearly a decade after the FAA. Not only does the NLRA not mention the FAA, but also the NLRA does not guarantee the availability of any particular adjudicative forum. Nor has Congress added language in the past 80 years. This silence, argues employers, cannot be a congressional command demonstrating a conflict between the FAA and NLRA, let alone permit the NLRA to supersede the FAA.

The employees and NLRB focus on the FAA’s savings clause at the end of the mandate: “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Employers argue the savings clause applies only to traditional contract defenses like unconscionability, fraud, duress, etc. The NLRB and employees argue that the savings clause captures any legal ground that would invalidate an agreement, like an illegal clause that is unenforceable because it violates the NLRA. In other words, an otherwise valid and enforceable agreement is vitiated as prohibited by the NLRA without ever reaching the questions regarding the FAA and its savings clause.

To Harmonize or Not Harmonize

The 7th and 9th U.S. Circuit Courts of Appeals flipped the script when analyzing the arbitration agreement’s enforceability in Epic Systems and Ernst & Young, respectively. Instead of applying the traditional analysis of first determining whether a valid enforceable arbitration agreement existed under the FAA before determining whether valid contract defenses undermined enforcement, they swapped the statutes out and started with the NLRA. Both courts followed the NLRB’s broad application of Section 7 and adopted the NLRB’s reasoning in D.R. Horton/Murphy Oil. This starting point is key because under with Chevron deference, the NLRB has broad authority to interpret the NLRA but no authority to interpret the FAA. By analyzing the NLRA first, the 7th and 9th Circuits deferred to the NLRB’s determination that class waivers requiring individual arbitration violate the employees’ Section 7 rights, which then necessitates evaluating whether the FAA mandates a different result.

The oral argument volleyed between the justices and the advocates on two central questions. First, is the right to bring a joint, collective, representative or class-based claim “concerted action” as understood and protected by the NLRA? And second, if it is concerted activity, is a contract deemed illegal and no longer valid if it requires bilateral arbitration and prohibits or halts an individual from participating in this concerted activity? Should the high court answer both of these questions affirmatively, the decision could uproot the fundamental attribute of arbitration, which permits the parties to choose with whom they arbitrate.

Ruling Could Bring Down the House

A ruling for the NLRB could drastically affect the state of arbitration in employment and in general. If the FAA is considered first, then the only enforceability defenses should be traditional contract defenses. However, if the NLRA is considered the cornerstone, then the NLRB’s interpretation stands a good chance of prevailing. And if that happens, a pebble thrown by an administrative agency will create ripples throughout employment law and beyond.

It also remains unclear whether the Supreme Court will address optional class waivers — or rather, the option to opt out of a class waiver provision — in arbitration agreements. As noted in the amicus briefs of the Retail Litigation Center and HR Policy Association, Section 7 gives employees the right to refrain from concerted activity, which would be a right exercised by the employee when not opting out of the class waiver.

But if employers cannot protect against class proceedings, especially in arbitration, they could halt offering arbitration agreements altogether. Class arbitration will prove too burdensome and too dangerous while lacking the efficiency benefits of an arbitral forum. Employees will lose the privacy protections unique to arbitration. Ultimately, should the Supreme Court fail to find the FAA controls, it could lead to the eventual elimination of arbitration in employment proceedings all together. With about one-fifth of the nation’s nonunion workforce covered by employment arbitration agreements, if it upholds the NLRB, the Supreme Court’s decision could flood our judicial system with employment cases that have been out of our courthouses and resolved in arbitration for decades.